Coca-Cola's bid for China firm sparks juicy debates

Grace Ng
The Straits Times
Publication Date: 22-03-2009

Fruit juice has never been this controversial.

Juicy theories about nationalism, protectionism and conspiracy have spilled forth as China - for the first time - used its anti- trust law to quash Coca-Cola's bid to swallow Chinese fruit juice maker Huiyuan.

Beijing's ruling last week to can the US$2.4 billion deal comes just when a recession-gripped world is ever more reliant on, yet wary of, a rising China.

Governments, fearful of spreading protectionism, are sensitive to perceived gaps between China's anti-protectionist stance and moves it may make to give its own companies a leg-up at home and abroad.

China's commerce ministry rejected

Coca-Cola's bid for Huiyuan because, it said, the merger would be bad for competition. This was the first major test of China's antitrust law, enacted last year to bring its business competition rules in line with the rest of the world.

Some analysts felt the significance of the largest proposed foreign takeover of a Chinese company lies not in its failure but in the forces that led to the outcome.

The no-go came as no surprise.

Shares of Hong Kong-listed Huiyuan had previously traded below Coca-Cola's HK$12.20 per share offer, signalling doubts about a deal that has attracted outcry against 'Coca-colonisation' from China's famously vocal netizens.

What is striking is that something as mundane as juice sparked a debate about the real reasons behind the rejection of Coca-Cola's bid.

Rather than the usual 'national icon' suspects like oil, telcos or flagship airlines that, elsewhere, have inflamed emotions, Chinese consumers are up in arms over cartons of apple, grape and pear puree.

Indeed, Beijing's rules issued in 2006 bar foreign ownership of domestic companies across a host of industries, from power generators to weapons - but not juice.

Huiyuan is also virtually unknown abroad, even though it is a household name in China, with an estimated 40 per cent of the market for pure fruit juices.

China has long tried to grow national brands that command global recognition, but so far only a handful - Lenovo, Haier and Galanz - have made it big.

To China's 1.3 billion consumers, the Huiyuan saga has come to symbolise the country's ambition to create its own global brands without foreign involvement.

"We need to limit foreign monopolies so China can build its own strong companies and brands like Lenovo, which will stand proudly on the world stage next to big Western brands," said Xiu Yan, a Beijing office worker.

More than seven in 10 people polled by China's popular instant messaging platform felt that a foreign takeover would lead to the 'decline and decay of national brands', and 45 per cent said they would boycott Huiyuan drinks if the company were to be acquired by Coca-Cola.

This may well be the first time that consumer activism, via China's army of opinionated netizens, has weighed in so strongly against a corporate takeover bid.

In the past few years, some established local brands have been taken over by big foreign names. US group Gillette bought Nanfu Battery in 2003, Mini Nurse went to L'Oreal in the same year and kitchenware brand Supor was absorbed by French firm SEB in 2006.

But this time, Huiyuan's founder Zhu Xinli was lambasted as a traitor for selling out to foreigners.

Even the hundreds of millions of dollars Coca-Cola had spent on sponsoring the Summer Olympics and the Olympic torch relay - not to mention its sponsorship deals with Olympic hurdler Liu Xiang and Houston Rockets star Yao Ming - failed to buy the goodwill it needed at the critical moment.

The commerce ministry's decision to "reject the Americans...(is) in line with popular sentiment and the will of the people", according to economics professor Zheng Fengtian of Renmin University.

But others wonder if protectionism, in the guise of antitrust, could be the dark underbelly of healthy Chinese nationalism.

It is this tension which makes the case a landmark one. This is the first time China has invoked its anti-monopoly law to prevent the foreign acquisition of a Chinese company.

The ministry has investigated 29 proposed deals since last August, and approved 24. It did not give the status of the other five or details of the deals.

If the Coca-Cola bid had been approved, "consumers would have been forced to accept higher prices and a smaller choice of products", a commerce ministry statement said last week.

On paper, the bid appeared to steer clear of the anti-monopoly law, which defines a company as dominant in its sector if it controls a 50 per cent market share or greater.

JP Morgan analyst Selina Sia estimated that the merged company would have held a 40 per cent share of the fruit juice market.

The ministry cited Article 28 of the law, a catch-all provision allowing the regulator to block takeovers if it believes the deal has the potential to 'adversely impact competition'.

It argued that Coca-Cola, a heavyweight in the fizzy drinks market with some 50 per cent market share in China, may leverage on its position to gain a stranglehold on the fruit juice market and force out smaller local producers.

Some analysts worry that the ruling may set a precedent for China to use the anti- monopoly law as a protectionist tool in future.

The law's relatively broad scope means that, in principle, it can be used to block virtually any foreign acquisition bid, said Mr Lester Ross, a Beijing-based managing partner of US law firm WilmerHale.

The law has provisions allowing the Commerce Ministry to take into account national security as well as 'national economy' concerns, he said.

In contrast, the United States, for example, keeps such provisions separate, thus limiting the types of transactions that may be blocked.

Beijing is expected to reject claims that its use of the law in deciding this case contradicts its stance against protectionism, when it joins the G-20 summit of rich and developing economies in London next month.

One day after the verdict on Coca-Cola, the Commerce Ministry told the official Xinhua news agency: 'Especially in the current financial crisis, China's leaders have said many times that all countries should oppose trade and investment protectionism. This stance has not changed.'

On the same day, Foreign Ministry spokesman Qin Gang told a regular news conference that the decision had nothing to do with trade protectionism but was made for the sake of market competition.

He brandished a bottle of water made by Nestle to stress his point that China maintains 'a policy of opening up and welcoming foreign capital'.

Still, with countries prone to engage in tit-for-tat protectionist measures, some may retaliate by blocking Chinese acquisitions abroad.

China is seeking to make some politically sensitive overseas purchases, such as Chinalco's US$19.5 billion capital injection into Rio Tinto, the Anglo-Australian mining giant.

Opponents of the deal in Australia have already latched onto the Coca-Cola case to bolster their campaign.

"Seeing that people in China have exactly the same concern on a similar issue, we'll say: 'Well, they backed their people. That's all we want, to back our own people'," Australian Senator Barnaby Joyce told the Los Angeles Times.

Some have suggested that China is hitting back after being a victim of protectionist measures overseas, notably in 2005 when political opposition blocked China National Offshore Oil Corporation's US$18.5 billion bid for US oil company Unocal.

The Coca-Cola case might be a response in particular to US criticism of Chinese investments, said Joseph Cheng, director of the Contemporary China Research Centre at the City University of Hong Kong.

'I think China is taking a preventive measure rather than a protectionist one by blocking the deal. It is warning other countries not to block investments in future because it will respond by doing the same,' he said.

Coca-Cola may have been relieved that it did not win the overpriced bid, but conspiracy theories on why it chose to hang on for so long have made their rounds. One wild theory said Coca-Cola was promised some incentives to play the bad guy in a plot to fire up Chinese consumers' loyalty to local products and get more government support for struggling local brands.

But such juicy tales simply reflect how one modest-sized Chinese juice maker's business decision to sell itself to an American giant, made at an unusual time in modern economic history, has turned it into a lightning
"It is the timing of the release of the decision that is a problem," said Professor Michael Pettis of Peking University's Guanghua School of Management.

"I understand that the ministry of commerce had good grounds for making this decision. But because of the current climate, it has been interpreted by international media as protectionist, even though this is not necessarily the case.'

For now, Huiyuan's brand will be preserved. Time will tell if it can run on its own juice to become a global brand name like Coca-Cola.